Education Tax Credits and Deductions — Too Good to Be True?

In the “You Got This” Weekly Series, we will answer a question from our customers found on Facebook, Twitter, TaxAct’s Blog, and around the web.

Question:

I am a graduate student and I receive nearly full remission of tuition and fees from my university as part of my compensation for my teaching assistantship. My 1098-T shows that I “paid” $3,500 in tuition in 2014, but received $3,400 in tuition remission. In reality, the University “paid” itself directly—the money never came through my hands—and I just paid the extra ~$100 in fees out of pocket.

When I entered the info from my 1098-T, it said I qualified for major student tax credits. Apparently, it added the remission (listed in the scholarships box on the 1098-T) to my income, and gave me credits based on the tuition I paid. I had expected that the remission and the tuition would cancel out, leaving only the $100 to use in calculating credits.

I’m just wondering if this is a mistake, or can I rightfully claim these tax credits, which add up to over $2,000?

Answer:

You may be able to claim an education tax credit if you received a tuition reduction as part of your compensation for a teaching or research assistantship.

Although you did not actually pay the tuition out-of-pocket, you are treated as having paid it for purposes of the education credit.

Tuition reductions are generally tax-free education benefits.

You do not include the amount in your income, and you cannot use the amount to claim an education credit.

However, tuition reductions that represent payment for services must be included in your income.

Because you have to pay tax on this benefit, it is treated as if you received it as part of your wages and then paid the tuition to the school.

You may need to check with your school to determine if the tuition reduction actually represents payment for services.

Question about the American Opportunity Credit

I am attempting to file my taxes and it’s claiming that I am not eligible for the American Opportunity Credit because my tax liability is less than the credit itself (because I made a little under $5,000 in wages last year and don’t owe any taxes, I assume).

However, I was told that I could get $1,000 back regardless. Why am I not getting this money?

Instead, it just gave me the standard $4,000 tuition deduction, and my taxable income comes out to around $700 rather than close to $5,000.

Is there something I am missing here or that I am misunderstanding?

Answer:

The American Opportunity Credit (AOC) is made up of two separate credits – a nonrefundable credit and a refundable credit.

The nonrefundable credit can offset up to $1,500 of tax, but it cannot be used to give you an additional refund if your tax is zero. The refundable credit can increase your refund by up to $1,000, whether or not you have a tax liability.

If you meet the basic AOC requirements, you qualify for the nonrefundable credit.

The basic requirements are that you were enrolled at an eligible school at least half-time in a program that leads to a degree, you have not completed the first four years of school, and you have not claimed the AOC on more than 3 prior returns.

If you are under age 24, you must meet an additional qualification to claim the refundable credit.

To qualify for the refundable credit, one of the following must apply to you:

1. You provided at least half of your own support, or
2. Both parents were deceased at the end of the year, or
3. You are filing a joint return with your spouse.

TaxACT will ask you all the relevant questions to determine which education benefits you can claim on your return.